Euro zone businesses outpace struggling British peers

LONDON (Reuters) - Business activity in the euro zone stayed robust in August as it outpaced Britain, where an economy increasingly bogged down by Brexit worries lost momentum, surveys showed on Tuesday.

Growth in the euro zone slowed only marginally from the blistering pace set in the spring, according to a Purchasing Managers’ Index. An equivalent reading for Britain was the lowest since last September, shortly after the referendum vote to leave the European Union.

“The story in the next couple of years is that by all probability - unless we get an external shock - the euro zone recovery is for real. I don’t see any reason why this will peter out anytime soon,” said Erik Nielsen, group chief economist at UniCredit.

“Where would growth come from at this stage in Britain? There is erosion of real income because of the inflation numbers and the uncertainty means investment will not play a role until you get some clarity on what is going on (about Brexit).”

IHS Markit’s Final Composite PMI for the euro zone held steady at 55.7 in August, slightly below an earlier flash estimate of 55.8. It has been above the 50-mark that separates growth from contraction since mid-2013.

The services PMI fell to a seven-month low of 54.7 from July’s 55.4 but was still one of the best growth rates in over six years. Similarly, while the new business index fell, it remained above its long-run trend.

The PMI for Britain’s dominant service industry fell to 53.2 in August from July’s 53.8, below the median forecast of 53.5 in a Reuters poll. [GB/PMIS]

The data suggested that euro zone and Britain’s economic growth paths are diverging.

The euro zone reading points to third quarter GDP expansion of 0.6 percent, IHS Markit said, matching second quarter growth and faster than the 0.4 percent predicted in a Reuters poll last month.[ECILT/EU]

Britain, which initially withstood the shock of the June 2016 Brexit vote before slowing sharply in early 2017, has outpaced the bloc’s economies over two-thirds of the time since recovery from the financial crisis began.

But rising inflation and weak wage growth has curtailed household spending and it is expected to grow just half the euro zone’s rate this quarter, 0.3 percent, then maintain that lackluster pace through to the middle of next year. [ECILT/GB]

A man carries shopping bags in a shopping district in downtown Madrid, Spain, November 26, 2015. REUTERS/Susana Vera

British shoppers increased spending in August at the fastest pace so far in 2017, excluding a surge in April caused by the Easter holiday, but there is little sign yet that a squeeze on spending is easing, retailers said on Tuesday.

Non-food sales remain at levels seen two years ago and separately on Tuesday, credit card firm Barclaycard said British consumers increased their spending at a slower pace in August and fewer of them felt confident about their finances.

PARTING WAYS

Forward-looking indicators in the euro zone survey imply there will be little slowdown this month with new orders, backlogs of work, employment and an expectation gauge remaining strong.

Yet while optimism among British company managers edged up, it remained close to low levels that have been indicative of the economy stalling or even contracting in the past, with Brexit the main concern, IHS Markit said.

“Higher costs and lower investment are slowing UK output to a chronic crawl. The summer months may have been warm but the recessional risks for the UK economy are only increasing as we move into autumn,” said Jeremy Cook, chief economist at WorldFirst, a foreign exchange payments company.

One common theme was rising price pressures - welcome news to policymakers at the European Central Bank who want inflation higher but less attractive to their counterparts at the Bank of England who want to bring inflation down.

ECB policymakers meet on Thursday, and while no change is expected then, they are expected to announce a reduction of monthly asset purchases in October, according to a majority of economists in a Reuters poll. [ECB/INT]

BoE rate-setters meet next week. Prices paid by services firms rose at the fastest pace in six months, potentially adding to Britain’s inflation rate, which is already heading for about 3 percent, above the central bank’s 2 percent target.

Most economists polled by Reuters were convinced the BoE will not raise interest rates between now and when the initial Brexit negotiation period ends in a little under two years. Only 14 of 59 economists expected one or more rate rises by end-2018.

Additional reporting by William Schomberg; Editing by Ross Finley and John Stonestreet